FOREIGN TRADE

In the early 1990s, internal and external economic conditions forced
a major reappraisal of Poland's export and import policies. The
once-profitable export markets of the Soviet Union were a much less
reliable source of income after that empire disintegrated and hard
currency became the predominant medium of exchange among its former
members. In this situation, increased trade with much more demanding
Western partners became the primary goal of Polish trade policy.

The Foreign Trade Mechanism

Centrally planned economies typically minimized trade with free-trade
markets because their central bureaucratic systems could not adjust
quickly to changing situations in foreign markets. The high degree of
self-sufficiency that was a declared economic objective of Comecon made
trade with the West a difficult undertaking for an economy such as
Poland's. On the other hand, the basically bilateral barter agreements
that characterized trade within Comecon often had made expansion of
trade within the organization problematic.

State monopoly of foreign trade was an integral part of centrally
planned economic systems. Even after some decentralization of this field
in Poland during the 1980s, the Ministry of Foreign Economic Relations
maintained direct or indirect control of all foreign trade activities.
Originally, trading activities in the communist system were conducted
exclusively by the specialized foreign trade organizations (FTOs), which
isolated domestic producers of exportables and domestic buyers of
imported goods from the world market. Then, in the late 1980s, some
state and cooperative production enterprises received licenses from the
Ministry of Foreign Economic Relations to become directly involved in
foreign trade, and by 1988 the number of economic units authorized to
conduct foreign trade had nearly tripled. Nonetheless, many enterprises
still preferred the risk-free, conventional approach to foreign trade
through an FTO, relying on guaranteed Comecon markets and avoiding
marketing efforts and quality control requirements.

Prior to 1990, the Polish foreign trade system included the following
elements: a required license or concession to conduct any foreign
transactions; allocation of quotas by planners for the import and export
of most basic raw materials and intermediate goods; state allocation and
control of exchange and transfer of most foreign currencies; an
arbitrary rate of currency exchange lacking all relation to real
economic conditions; and artificial leveling of domestic and foreign
prices by transfers within a special account of the state budget. Even
among Comecon countries, Poland's foreign trade had particularly low
value. Its share of total world exports, 0.6 percent in 1985, dropped to
0.4 percent in 1989. The share of imports dropped even lower, from 0.5
to 0.3 percent, in the same period.

In early 1990, Poland entered a painful process of massive
transformation for which reintegration into the world economy was a
primary objective. The first postcommunist government dismantled the
existing foreign trade mechanism and replaced it with a mechanism
compatible with an open market economy. This change eliminated license
and concession requirements for the conduct of foreign trade activities,
eliminated quotas except in trade with the Soviet Union, introduced
internal convertibility of the zloty and free exchange of foreign
currencies, and accepted the rate of exchange as the main instrument of
adjustment of exports and imports, supported by a liberal tariff system.

Postcommunist Policy Adjustments

In early 1990 the Mazowiecki government planned to maintain Poland's
high export volume to the Soviet Union for an indefinite period. The
goal of this plan was to ensure a long-term position for Poland in that
important market and to protect domestic industry from a further decline
in production and increased unemployment. Subsequently, however, an
export limit became necessary to avoid accumulating an excessive surplus
of useless transferable rubles. In 1992, after the Soviet Union split
into a number of independent states, the Polish government had no
indication whether existing balances would ever be exchanged into
convertible currencies, or under what conditions that might happen.

In December 1991, Poland reached agreement on associate membership in
the European Community (EC). Having taken this intermediate step, the
Polish government set the goal of full EC membership by the year 2000.
Among the provisions of associate membership were gradual removal of EC
tariffs and quotas on Polish food exports; immediate removal of EC
tariffs on most industrial goods imported from Poland and full
membership for Poland in the EC free trade area for industrial goods in
1999; EC financial aid to restructure the Polish economy; and agreements
on labor transfer, rights of settlement, cultural cooperation, and other
issues. The agreement, which required ratification by the Polish
government, all twelve member nations of the EC, and the European
Parliament, went into interim operation as those bodies considered its
merits. Both houses of the Polish parliament ratified the agreement in
July 1992.

The End of the Soviet Era

In 1990 Poland's trade balance with the Soviet Union was almost 4.4
billion transferable rubles. At that point, some Polish exporters took
the risk of continuing their exports to traditional Soviet markets,
hoping that they would eventually be paid either by the importers in the
Soviet Union, who were very anxious to get Polish goods, or by the
Polish government. In the first quarter of 1991, the value of these
exports was about US$130 million. Only about US$20 million was received,
however, because the Soviet government was prepared to pay only for
imported foodstuffs, which received highest priority in its import
policy. The Soviet government refused to pay the bill for Soviet
importers who had purchased machines, pharmaceuticals, electronics,
textiles, and clothing from Poland.

The sudden collapse of Comecon in 1990 increased short-term obstacles
and accelerated changes in the geographic direction of trade. The share
of Poland's trade occupied by the Comecon group declined to 22.3 percent
in 1990 and 14.4 percent in 1991. On the export side, its share declined
to 21.4 and 9.8 in the respective years.

The Role of Currency Exchange

In this situation, expanded exports to the West provided the only
alternative for the many enterprises whose survival depended on foreign
trade. The government's stabilization policy had an impact that promised
expansion of exports to hard-currency markets. In 1991 drastic
limitation of domestic demand, devaluation of the zloty by 32 percent,
and liberalization of access to foreign trade by private entrepreneurs
resulted in significant expansion of export earnings in convertible
currencies. In 1990 the volume of hard-currency exports increased by
40.9 percent to over $US12 billion, while hard-currency imports
increased by 6.3 percent, securing a positive trade balance of $US2.6
billion.

The level of exports earning hard currency in 1990 was particularly
impressive in comparison with the generally sluggish growth of that
category in the late 1980s. In the last years of the communist era, fuel
exports declined steadily, and metallurgical exports decreased in three
of the last five communist years. Construction work in countries paying
in hard currency declined in the first three years of the period,
whereas exports from the wood and paper, engineering, and chemical
industries behaved unevenly.

In 1990, by contrast, hard-currency exports increased in most sectors
of the economy. The largest increases in that category were achieved in
agricultural, metallurgical, and chemical products. In general, the
share of manufactured products in Poland's export mix declined sharply
with the sudden shift away from Comecon trade. In 1990 the largest major
categories of manufactured exports were, respectively, machines and
transport equipment, miscellaneous manufactured goods, and chemicals;
their share of total exports was 42.4 percent, compared with 67.3
percent for the same categories in 1985. Growth in exports of food, raw
materials, and fuels accounted for the difference.

Although the share of engineering products among exports declined,
that group was the most important single earner of hard currency in
1990, followed by metallurgical, chemical, and food products. In 1992
all those industries possessed considerable capacity to expand their
productivity, given appropriate investment in modernization and
efficient marketing. However, both modernization and marketing depended
heavily on cooperation with Western firms. Despite the remarkable
increase in hardcurrency exports in 1990, their overall impact on the
national economy was limited by the strong effect of reduced
transferableruble exports on the priority sectors. In 1990 Polish light
industry led the general decline in ruble exports.

At the beginning of 1991, however, the growth rate of hardcurrency
exports declined, and imports increased very rapidly. Inflation remained
high, and the advantage created by the 1990 devaluation slowly eroded.
Another devaluation, this time 17 percent, was effected in May 1991. At
the same time, the zloty was pegged to a combination of hard currencies
instead of to the dollar alone. In October the fixed exchange rate was
replaced by an adjustable rate that would be devalued automatically by
1.8 percent every month as a partial hedge against inflation. The final
import figure for 1991 was 87.4 percent higher than that for 1990. In
1991 exports in convertible currencies were a little over US$14.6
billion and imports were nearly US$15.5 billion, creating a
hard-currency trade deficit of about US$900 million.

Figures for the first five months of 1992 showed a reversal of the
previous year's imbalance. The hard-currency trade surplus of US$340
million reported for that period was attributed to a combination of
commodity turnover and cancellation of interest payments in Poland's
debt reduction agreement with the Paris Club.

For years under the old system, Poland dispersed small amounts of its
export and import trade to a large number of nonComecon countries on all
continents. Experts considered such dispersion a policy weakness because
marginal suppliers and buyers usually trade at less favorable terms than
high-volume partners, making the former expendable in hard times. This
factor became even more important in the first postcommunist years; in
1990 Poland's fifteen top import customers absorbed only 81.3 percent of
exports, while the fifteen top suppliers contributed 86.2 percent of
Polish imports. Poland's traditional partners in the former Soviet Union
and Germany (before and after their respective realignments) retained
disproportionately high shares in both categories in 1990.

Foreign Investment

By the end of 1991, Poland had obtained US$2.5 billion from the World
Bank and other international financial organizations and US$3.5 billion
in bilateral credits and guarantees of credit from Western governments.
In 1992, however, the limited absorptive capacity of the country still
restricted the amounts of foreign cash and credit that could be used.
Only US$428 million was utilized in 1990, about US$800 million in 1991.
A significant increase was expected in 1992.

Poland's net balance of payments deficit, calculated as the
difference between credits used and the amount paid to service the
national debt, was more than US$1.3 billion in 1989, US$312 million in
1990, and US$449 million in 1991. In the long run, even investment
credits and continued growth of exports could not maintain a balance of
payments equilibrium without a substantial inflow of direct foreign
investments.

Cooperative enterprises with foreign firms also offered access to
advanced technology, better export trade, improved management and
training, and attractive job opportunities for younger members of the
work force. The first year of postcommunist rule brought an initial
surge of investment in which permits for formation of foreign companies
more than doubled. A number of United States, British, French, Swiss,
Swedish, Dutch, and Japanese firms started Polish enterprises.
Significantly, the share of permits issued to German firms dropped from
60 percent in 1989 to 40 percent in 1990, and that figure was expected
to remain at about 30 percent after 1991.

Despite the adoption of very liberal investment legislation in the
middle of 1991, however, the year did not bring the anticipated
investment increases. In 1991 and 1992, major inhibiting factors were
real and perceived political instability, conflicting and slow changes
in economic policy, a faulty system for taxation of foreign enterprises,
and a steep decline in the GNP. In spite of the increase in registered
foreign direct investment projects between 1989 and 1991, the registered
foreign capital involved in these projects was only US$353 million in
1990 and US$670 million in 1991. The actual investment amounts were not
more than 40 percent of those amounts. At the end of 1991, some 4,800
partnerships operated with foreign participation. Of these, 43 percent
were in industry, 24 percent in trade, and 6.6 percent in agriculture;
about two-thirds of foreign ventures were concentrated in the economic
centers of Warsaw, Poznan, Gdansk, Szczecin, Katowice, and ód --meaning
that foreign investment was not benefiting many of Poland's less
prosperous regions. Altogether, the foreign partnerships generated less
than 1 percent of Poland's total national income in 1991.